Canadian Natural and Pengrowth likely buyers for KNOC assets

Pengrowth Energy Corp. and Canadian Natural Resources Ltd. are likely buyers of Korea National Oil Corp.’s Canadian oil and natural gas properties as the state-run company retreats from the country it once made a cornerstone of its global expansion.

Buyers may be drawn to the lower prices the company will have to consider as it vies with a glut of properties for sale, said Kyle Preston, an analyst at National Bank of Canada. KNOC, as the South Korean company is known, said Sept. 6 it was in initial talks with potential buyers of its Canadian division as it seeks to boost returns from its foreign businesses.

“KNOC is looking to sell into a very over-saturated market,” so the price is going to reflect that, said Chris Cox, an analyst at AltaCorp Capital Inc. in Calgary.

Pengrowth, which operates a small oil-sands operation using similar steam-based technology, might be interested in KNOC’s assets, Cox said in a Sept. 6 telephone interview from Calgary. Canadian Natural, known for buying land “on the cheap,” may want KNOC’s traditional oil and gas properties, he said. The properties also may appeal to Husky Energy Inc., which has operations in the oil sands, Preston said by phone the same day.

KNOC first bought into Canada in 2006 when it acquired oil- sands holdings from Newmont Mining Corp. for $270 million. It then paid C$4.1 billion ($4 billion) including debt in 2009 for Calgary-based Harvest Energy Trust. It was the Anyang, South Korea-based company’s largest purchase, according to figures compiled by Bloomberg.

Fiscal Loss

KNOC paid $525-million for additional Canadian assets from Hunt Oil Co. in 2010.

The South Korean government largely blamed the company’s 904 billion won ($840-million) loss last fiscal year on the poor performance of overseas investments, including the Canadian unit Harvest Operations Corp. Choi Hong Seok, a spokesman for KNOC, declined to specify in a Sept. 6 phone interview which assets are for sale.

KNOC will probably divest in Canada piecemeal as it tries to sell a money-losing refinery and faces new rules limiting oil-sands buyers, National Bank’s Preston said. The company will have to compete with properties for sale in Canada that produce the equivalent of about 300,000 barrels of oil a day, he said.

“You take into account the lack of interest in oil-sands assets and the number of oil-sands assets out there for sale as well, and that makes it that much more competitive,” Preston said.

First Phase

KNOC’s BlackGold oil-sands holdings in Alberta, where the company will inject steam underground to melt the tar-like bitumen so it can flow to the surface, may be valued at $1-billion, said Robert Mark, director of research at MacDougall, MacDougall and MacTier Inc. in Toronto. The project is set to begin producing next year, with output from the first phase rising to 10,000 barrels a day, according to Harvest’s website.

In addition to the Canadian companies, PetroChina Co. may be attracted to KNOC’s traditional oil and gas assets in Canada to expand its position in the country, Cox said. China Petrochemical Corp. may want to bolster its western Canadian holdings, MacDougall’s Mark said.

Pengrowth, Canadian Natural and Husky declined through representatives to comment. Mao Zefeng, a spokesman for PetroChina, didn’t return messages seeking comment and Lv Dapeng, a spokesman for China Petrochemical, didn’t answer two calls to his office.

Foreign Takeovers

KNOC may be able to package its traditional oil and gas properties for sale, then do a separate deal for the oil sands, Mark said. Buyers for its oil-sands stake will be limited by changes announced by Prime Minister Stephen Harper in December to Canada’s foreign-takeover law that restrict state-owned companies from acquiring oil-sands businesses unless there are “exceptional circumstances.”

Finding a buyer for KNOC’s money-losing Canadian refinery, Come By Chance, probably will be the biggest priority and hardest to achieve in a market where struggling plants in Europe and North America are closing or converting to storage.

Harvest’s refining and marketing division posted an operating loss of C$52 million in the second quarter, according to financial statements from KNOC’s Canadian unit.

“They’re likely going to have a real challenge selling that refinery,” Preston said.

Newfoundland Refinery

The refinery, located in the nation’s easternmost province of Newfoundland and Labrador, was part of the Harvest deal. Profit margins at the plant fell 89 percent in the last four years, according to figures compiled by Bloomberg from the company’s financial reports.

KNOC’s island-based refinery can’t tap into cheaper North American fuel supplies brought by rail and must rely on more expensive imports. It also lacks the kind of processing units that can turn crude into the highest-value light-petroleum products that generate more profit for its competitors, said Charles Kemp, an industry consultant at Baker & O’Brien Inc. in Dallas.

A total pullout by KNOC from Canada would be surprising given the company’s strategy of building up global oil supplies to feed domestic consumption, said Terry Marshall, a senior vice president with Moody’s Corp. in Toronto.

Though there are more sellers than buyers in Canada, deals can still get done for “quality assets at reasonable prices,” Jennifer Stevenson, a portfolio manager at Goodman & Co. Investment Counsel Ltd. in Calgary, said in an e-mail.

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